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 Market Forms

Q- Meaning and basis for classifying market form.


Forms of Market:

 Market may assume different forms depending on the factors like number of buyers and sellers, nature of the product bought and sold and barriers to entry and exit of firms.
 On the basis of the given factors there are two main forms of market:

 Perfect Competition:

 It is a form of market where there are very large number off buyers and sellers of a commodity. No individual seller has control over market supply. where homogeneous products are sold at a uniform price. There is freedom of entry and exit of firms.Buyers and sellers have perfect knowledge about the market condition.

Imperfect Competition:

This market is classified in three types are as follow:
  1. Monopoly: It is a market structure in which there is a single seller and there are no close substitutes of the commodity sold by the monopolist. e.g. government has the monopoly of cable networks, water supply, Indian railways, etc.
  2. Monopolistic Competition: It is a form of the market in which there are many sellers of the product, but the product of each seller is somehow different from that of the others. e.g. firms producing different brands of toothpastes, viz colgate, closeup, pepsodent, etc.
  3. Oligopoly: It is form of the market in which there are a few big sellers of a commodity and a large number of buyers. Each seller has a significant share of the market, e.g. there are only a few auto-producers in the Indian market. Maruti, Tata, Fiat, Ford and GMare some well-known brand names in this sector.

Q- Define perfect competition. Explain its various features of perfect competition?

Perfect Competition:

 It is a form of market where there are very large number off buyers and sellers of a commodity. No individual seller has control over market supply. where homogeneous products are sold at a uniform price. There is freedom of entry and exit of firms.Buyers and sellers have perfect knowledge about the market condition.

Features of Perfect Competition
 Perfect competitive market exhibits the features given below:
  1.  Very large number of buyers and sellers: There are very Marge number of buyers and sellers in the market due to which no individual buyer or seller can influence the price of the commodity in the market. Any change in the output supplied by a single firm will not affect the total output of the industry, as they are very small according to the market size. Similarly, any change in the demand pattern of one buyer would not affect the market demand because of his insignificant share in the total demand of the commodity.
  2. Homogeneous product: Firms in this market sell homogeneous product. Homogeneity of a product implies that one unit of the product is a perfect substitute for another, i.e. there is no difference in the products in any form. 
  3. Free entry and exit of firms: In a perfectly competitive market, there are no barriers to entry or exit of firms. Entry or exit may take time, but firms have freedom to move in and out of an industry, without any government intervention.
  4.  Perfect knowledge: Firms have all the knowledge about the product market and the factor market. Buyers also have perfect knowledge about the product market.
  5. Perfect nobility of factors of production: The factors of production can move easily from one firm to another. Workers can also move between jobs and places. 
  6. Absence of transportation cost: It is assumed that goods can be easily transported from one place to another without any additional transportation cost or that the transportation cost of all the firms are identical.

Q- Define Monopoly. Discuss its features.

It is a market structure in which there is a single seller and there are no close substitutes of the commodity sold by the monopolist. e.g. government has the monopoly of cable networks, water supply, Indian railways, etc.
Features of Monopoly:
 Monopoly market exhibit the features given below: 
  1. One seller and large number of buyers: Under monopoly, there is a single producer of a commodity. He may be alone or there may be a group of partners or joint stock company or a state. However, there are a large number of buyers of the product.
  2.  Restrictions on the entry of new firms: Under monopoly, there are some restrictions on the entry of new firms into the monopoly industry. Generally, there are patent rights or exclusive control over a technique or raw material which prevents other firms to enter into the market.
  3. No close substitutes: A monopoly firm produces a commodity that has no close substitutes, e.g. there is no close substitute of operating systems made by Microsoft. They have monopoly in this segment.
  4. Full control over price: Being a single seller of the product, a monopolist has full control over its price. A monopolist thus, is a price maker. He can fix whatever price he wishes to fix for his product. Therefore, a monopolist is referred to as price maker.
  5. Price discrimination: A monopolist may charge different prices from different buyers. It is called price discrimination. e.g. electricity boards charge higher tariff for commercial use than domestic use.
  6. Price maker: Under monopoly, single seller dealt in the market and he holds the power over the price that he charges for a commodity.

Q- Explain monopolistic compititon and its features.

It is a form of the market in which there are many sellers of the product, but the product of each seller is somehow different from that of the others. e.g. firms producing different brands of toothpastes, viz colgate, closeup, pepsodent, etc.

Monopolistic market exhibits the features given below: 
  1. Large number of buyers and sellers: There are large number of buyers and sellers of the commodity. No individual seller is big enough to influence the market on his own and no single buyer can exercise any big influence on the price of the product on his own. 
  2. Product differentiation The products of the sellers are differentiated but are close substitutes of each other. Product differentiation can be real or artificial. Its effect is that sellers have some control over the price of their product. 
  3. Free entry or exit of firms Firms can freely move in and out of a group. In monopolistic competition, the concept of industry is undefined as product of industry, the word group' should be used. 
  4.  Imperfect knowledge Buyers and sellers do not have perfect or market condition. Buyer's preferences are guided by advertising and other selling activities undertaken by the sellers.
  5. Selling cost A firm under monopolistic competition incurs selling cost, which is the cost of promoting the demand for its product, e.g. advertisement, window displays, salesmen salaries, etc.
  6.  High transportation cost Cost of transporting the commodity from one place to another is very high under monopolistic competition.

Q- Distinguish between perfect competition and monopoly?


Basis
Perfect competition
Monopoly
Numbers of Sellers
There are very large numbers of sellers and no individual seller has control over market supply.
There is single seller and the monopolistic has full control over the market supply.
Nature of products
The product is homogeneous. It is identical in all respect.
There is no close substitute of the product.
Entry and exit
There is freedom of entry and exit of firms.
There is restriction on entry and exit. So a firm can earn abnormal profit and loss in the long-run.
Price
Firm is the price-taker as price is determined by the industry.
Monopolistic is a price-maker as firm and industry are one and the same thing.
Level of Knowledge
Buyers and sellers have perfect knowledge about the market condition.
Buyers and sellers do not have perfect knowledge about market condition.
Selling Cost
No selling cost is incurred.
Selling cost is incurred.

Q- Distinguish between perfect competition and monopolistic competition?

Basis
Perfect competition
Monopolistic competition
Numbers of Sellers
There are very large numbers of sellers and no individual seller has control over market supply.
There are large number of seller. So, a firm does not have much impact on market supply.
Nature of products
The product is homogeneous. It is identical in all respect.
Product are differentiated on the basis of Brand, size, colour, shape, etc.
Entry and exit
There is freedom of entry and exit of firms. It leads to absence of abnormal profit and losses in long-run.
There is freedom on entry and exit. So a firm can earn only normal profit in the long-run.
Price
Firm is the price-taker as price is determined by the industry.
Firm has partial control over price due to product differentiation.
Level of Knowledge
Buyers and sellers have perfect knowledge about the market condition.
Buyers and sellers do not have perfect knowledge due to differentiation and selling cost incurred by the seller.
Selling Cost
No selling cost is incurred.
Heavy selling cost is incurred.

Q- Discuss nature of demand curve under:
  • Perfect competition
  • Monopoly
  • monopolistic competition
  • Oligopoly competition


Demand curve under perfect competition:

 
Under perfect competition, demand curve of the firm is perfectly elastic.
(Ed=∞). 
It means that the firm can sell any amount of prevailing price.

Demand curve under monopoly:

Under monopoly, the firm's demand curve slopes downward from left to right. It means that if a monopolistic wants to sell more, he has to reduce the price of the products.
The given figure shows inverse relationship between price and quantity. 

Demand curve under monopolistic competition:
Demand curve under monopolistic competition downward sloping from left to right, exhibiting an inverse relationship between price and quantity demanded.
 It is because in a monopolistic competitive market, goods have close substitutes, hence consumers can easily choose the substitutes whenever there is change in the price of a commodity. 
AR curve is the demand curve of a monopolistic competition firm, which is negatively sloped and elastic.
Demand curve under Oligopoly:
The conditions in oligopoly market is very complicated. It s tricky to determine the firm's demand curve as in this competition, one cannot predict the change demand.
 When a firm lowers its price, demand for its product may not increase as the rival firms may opt this price cut policy Hence, demand curve under this form of market cannot be determined. 
Professor Paul Sweezy had drawn a demand curve known as kinked demand curve, for oligopoly market which has two segments in the single curve, one of which is relatively more elastic than the other.


Q- Explain the term 'price maker' and 'price taker'. Under which market form seller is called price maker and price taker and why?

Price maker: The firm is called a price maker. As a single seller deals in the market therefore he holds the power over the price that he charges for a commodity.
Price taker: The firm is called a price taker. It has to adopt the price determined by the market forces of demand and supply.

Under perfect competition, the price is determined by the industry because there are large number of sellers of homogeneous product. No single seller by changing the supply can influence the price. So, the firm is a price taker. 
Under monopoly, a monopolist is a single seller and determines the price himself. He is a price maker. There is no challenge to his price decisions as there are no other firms in the market and there are no close substitutes of his product. Barriers to entry of new firms further strengthen his position as a price maker.

Q- Why are firm said to be interdependent in an Oligopoly market? Explain?

Oligopoly is a form of market in which there are only a few firms operating in the market and each firm is very large in size. This leads to huge interdependence among the firms. They generally avoid price competition as a price-cut by one firm may lead to price war, leading to loss of revenue for both firms.

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